Up to $3 billion in Deals Offered to McDonald’s for its China, HK stores: Reuters

06/23/2016

In an auction that could fetch up to $3 billion, more than half a dozen offers that include bids from Beijing Tourism Group, Sanpower and ChemChina have been made for McDonald's Corp’s China and Hong Kong stores, reported Reuters quoting people familiar with the matter.

A joint bid has been submitted by the Sanpower Group, a technology and real estate firm, and Beijing Tourism Group for the stores, the former announced late on Wednesday.

The sources told Reuters that with a view to teaming up with Chinese strategic bidders, buyout firms including Bain Capital, TPG Capital and Carlyle Group are also participating in the auction.

Based on a franchisee mode, the restaurants in Asia of the U.S. fast food company would be owned by partner as a p art of McDonald’s efforts to reorganize its Asian operations. by spinning it off ahead of a likely IPO next year, competitor Yum Brands is also restructuring its China business.

Local partners who could better manage public perception in the wake of food-safety scares that hit the two fast-food giants in the last few years and could help ward off growing competition from domestic rivals are being sought by McDonald's and Yum which is exhibited by their planned sale of China units.

"Given the difficulties Western chains have had recently with public perception, local players have become a serious competitive threat," said Elizabeth Friend, consumer foodservice analyst at Euromonitor International.

Reuters had previously reported that to run the sale of about 2,800 restaurants in China, Hong Kong and South Korea, Morgan Stanley had been hired by the Oak Brook, Illinois-based McDonald's. The sources said that since the sale in South Korea is being run separately and it was not known if the same parties have expressed interest in that sale.

A a 20-year master franchise agreement with an option to extend it by another 10 years is being offered by McDonald’s as part of the deal.

The sources said that some private equity firms have been discouraged from participating in the auction as the buyout firms have been stipulated by McDonald’s to remain a minority partner in any bidding consortium.

Beijing Capital Agribusiness Group, which is McDonald's current China partner, and GreenTree Hospitality are among the firms who were preparing to place first-round bids ahead of the June 20 deadline. In the coming weeks a shortlist of bidders for the next round would be drawn up by McDonald's.

There were no comments available from all of the parties that are involved n the development. However a McDonald's representative said that since no decisions have been made, it would be premature to speculate further and confirmed that the company was "making progress" in the sale process.

Industry data shows McDonald’s is China's No. 2 fast food chain behind Yum, which operates the KFC and Pizza Hut chains even though the US fast food chain does not break out country-by-country revenue details.

Reuters reported that McDonald's China and Hong Kong business could be sold for about 15-16 times its core earnings, taking the deal value to about $3 billion as the units had posted about $200 million in earnings before interest, tax, depreciation and amortization for fiscal 2016.

While some sources told Reuters that the sale is likely to fetch around $2 billion since McDonald’s earnings have been volatile and it made only $65 million for 2015. This is likely to weigh on how some of the suitors could value the business.